Stop gap’ leases drive tenancy lengths to record low

The annual study by the British Property Federation and Investment Property Databank (IPD), the property industry’s global benchmarking metric, found that 76% of new leases signed in 2011 were for less than five years in length. Leases signed in 2011 averaged 4.8 years – a decline of well over a year compared to pre-recession levels in 2007.

The survey is drawn from more than 100,000 retail, commercial and industrial leases and is the largest of its kind in the UK.

The data, to be released in full at the British Property Federation Annual Conference tomorrow shows:

• Average leases lengths have fallen from 6.2 years in 2007 to 4.8 years in 2011
• Lettings to SMEs are even shorter, at 4.1 years
• 78.3% of newly granted leases in SMEs in 2011 were under five years in length, 19.2% for up to 10 years and only 2.1% up to 15 years.
• High streets retail units saw a further reduction in lease lengths, falling from 7.7 to 7.6 years ( 2007 they 9.7 years).
• Rent free periods are quite commonplace on even relatively short leases, 32.9% of retail leases under 5 years, and 35.5% of industrial leases of the same duration.

Liz Peace, chief executive of the British Property Federation, said: “In uncertain times it is quite understandable that occupiers are opting for shorter leases. The long term trend has for some time now been towards a shorter lease, but this has been accentuated over the past year by economic circumstances.

The market continues to deliver variety – short leases for start-up SMEs, but longer leases for retail and office occupiers certain of their future who will get a good deal in return for their long-term commitment. The security of income that comes with a long lease helps our industry raise finance particularly for development projects and so there will always be a place for the longer lease to help support development and growth in our economy.

Anyone thinking of starting a business in the current climate will find some good deals in the market and the widespread provision of rent free periods, even on shorter leases, and also high incidence of break clauses, all reflects this.

The movement towards shorter leases poses a challenge to our industry to avoid voids and maintain security of income. Landlords that are continually investing in their buildings and focusing on customer service will be those that best thrive in this new paradigm.”

Greg Mansell, Senior Research Manager at IPD, said, “The ‘necessary evil’ for landlords to sign a short lease to secure income to offset their short-term liabilities is increasingly becoming the norm. Weak occupier demand, off the back of austerity cuts and the return to mild recession, has left landlords struggling to let their properties, and thus they are accepting ever shorter leases. For the last four years the average lease signed has been under six years in length.”

“The implications for the future of UK property values are more complex. While short leases give the opportunity for achieving higher rents in future lettings, this relies on a degree of confidence returning to the occupier market. Conversely, the prevalence of short leases prolongs the uncertainty in the investor market – the net result is a lack of value growth.”

“Despite the impacts on values, shorter leases are making the market more flexible and accessible for retailers, office occupiers, SME’s and large companies at a time when they need it most.”